Market volatility is an inevitable part of investing, but for retirees relying on their portfolio for income, it can be particularly unsettling. Bear markets and corrections can wreak havoc on your retirement plans if you’re not prepared. Let’s explore strategies to shield your income from market downturns and keep your retirement on track.
Understanding Sequence of Returns Risk
One of the biggest threats to retirement income is sequence of returns risk. This refers to the potentially devastating impact of experiencing poor market returns in the early years of retirement when you’re beginning to withdraw from your portfolio.
Here’s why it matters:
- If you start withdrawing money when your investments are down, you’re selling more shares to meet your income needs.
- This leaves fewer shares in your portfolio to benefit from eventual market recoveries.
- The result can be a significantly depleted portfolio that may not last through your retirement years.
Building a Buffer: The Bucket Strategy
One effective approach to mitigate sequence of returns risk is the bucket strategy. Here’s how it works:
- Short-term bucket: Hold 1-2 years of living expenses in cash or cash equivalents.
- Mid-term bucket: Invest 3-5 years of expenses in conservative, income-producing assets.
- Long-term bucket: Allocate the rest to growth-oriented investments.
This strategy allows you to ride out market downturns without being forced to sell depreciated assets, giving your portfolio time to recover.
The Power of Diversification
Diversification remains one of the most powerful tools for managing market risk. A well-diversified portfolio might include:
- Stocks: For long-term growth potential
- Bonds: To provide income and stability
- Real estate: As a potential hedge against inflation
- Alternative investments: To further diversify your portfolio
Remember, different asset classes often react differently to market conditions. When one area struggles, another may thrive.
Dynamic Withdrawal Strategies
Rather than sticking to a fixed withdrawal rate, consider adjusting your withdrawals based on market performance:
- In good years, you might withdraw a bit more, allowing for some extras.
- In down years, tighten the belt and withdraw less.
This flexibility can significantly extend the life of your portfolio.
The Role of Guaranteed Income
Creating a foundation of guaranteed income can provide peace of mind during market turbulence. Consider:
- Maximizing Social Security benefits: Delaying claims can significantly increase your lifetime benefit.
- Exploring annuities: While complex, certain annuities can provide a stable income stream regardless of market performance.
With a base of guaranteed income, you may be able to tolerate more risk (and potential growth) in your investment portfolio.
Roth Conversions in Down Markets
Market downturns can present opportunities for Roth conversions. By converting traditional IRA assets to a Roth when values are depressed, you can:
- Pay taxes on a lower amount
- Allow for tax-free growth on the recovery
- Potentially lower your future required minimum distributions (RMDs)
This strategy can be particularly valuable if you believe your tax rate may be higher in the future.
The Importance of Rebalancing
Regular portfolio rebalancing is crucial, especially during volatile markets. It helps maintain your target asset allocation and can even boost returns by systematically “buying low and selling high.”
Psychological Preparation
Perhaps the most important strategy is mental preparation. Understanding that market downturns are normal and temporary can help prevent panic-driven decisions that can derail your long-term plans.
Work With Us
Navigating bear markets and corrections while drawing retirement income requires a delicate balance of strategy, flexibility, and discipline. At Brogan Financial, we specialize in creating robust retirement income plans designed to weather market storms.
Don’t let market volatility threaten your retirement dreams. Contact Brogan Financial today to schedule a consultation. Together, we’ll build a retirement income strategy that aims to provide the stability you need and the growth you desire, regardless of market conditions.
For weekly financial tips and insights, tune in to ‘More Living with Jim Brogan’ every Saturday morning at 9 only on 98.7 FM WOKI. Your journey to a more resilient retirement starts here.
